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The 5 Top China ETFs

China's emerging market has become the second-largest economy in the world, and investors want a piece of it.

China is the most populous nation on Earth, and its rising economy over the past 20 years has given what many still consider to be an emerging market an impressive growth trajectory for many of its companies. Chinese growth stocks have produced strong returns over time, and U.S. investors have sought convenient ways to break into the Chinese stock market. Exchange-traded funds offer a quick way to get diversified exposure to Chinese stocks, yet investors have to choose among different China ETFs with different approaches toward investing there.

The following five China ETFs offer a variety of ways for you to get the China exposure you want in your portfolio.

How iShares came to dominate China ETFs

iShares is well represented among the most popular funds in the China space, with the only three country-specific offerings that crack the $1 billion mark. The slight differences in approach among the three iShares China ETFs reveal the various ways investors can look at Chinese stocks.

The iShares MSCI Hong Kong ETF was the earliest available fund for investors to use. Hong Kong reverted to Chinese control in 1997, and for a long time, the only way for Western investors to get access to Chinese companies was through stocks listed on the Hong Kong Stock Exchange. Today, the Hong Kong ETF has its largest concentrations in the real estate and insurance industries, which together make up almost half of the fund's assets. Capital goods and utilities stocks each get allocations of greater than 10%, and banks and diversified financial companies also play a key role in the fund's portfolio. The Hong Kong space has outperformed pure Chinese stocks over the past five years by a substantial margin, largely reflecting China's slowdown over the period.

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The iShares China Large-Cap ETF has become the key benchmark for ETF investors in China. The portfolio includes some of the most important companies in the emerging-market nation, including giants in the internet and telecommunication services industries. However, more than half of the fund is invested in financial stocks, and for a long time, some investors have feared that the level of state control over holdings in the fund make the China Large-Cap ETF more susceptible to adverse government policies.

The iShares MSCI China ETF addresses some of the concerns about its sibling fund. The index that the fund tracks has a greater emphasis on information technology stocks, which make up almost 40% of the fund. Financials still get a nearly 25% allocation, but consumer discretionary stocks get 10% of assets, and other industries such as telecom, energy, industrials, and real estate are fairly represented as well.

Trying to catch up

The SPDR ETF was a late player to the China ETF realm, and it uses an approach similar to that of the iShares MSCI China ETF. The SPDR seeks to invest in all publicly traded companies above a certain size that are available to foreign investors, with more than 350 holdings in its portfolio. The other two main internet ETFs specifically look to go beyond U.S. investments. Its asset allocation reflects the importance of the internet in China, with a third of assets in IT, almost a quarter in financials, and weighted exposure to consumer discretionary, industrials, and real estate stocks rounding out the top sectors.

Drilling down on the internet

Finally, China is a big enough market for specialty ETFs to arise. The KraneShares ETF includes stocks of Chinese internet companies, including those that run search engines, social-media sites, microblogging services, and e-commerce portals. The fund has a shorter history than its peers, but its short-term performance has been particularly impressive as the growing consumer class in China starts to spend more discretionary income.

Which China ETF is best for you?

As China opens up to investment, the best ETFs are those that give exposure to the fastest-growing segments of the economy. Despite being the largest by assets, iShares China Large-Cap will be at a disadvantage to rivals that have greater IT exposure, unless it can change its target and rid itself of the troubling state-owned enterprise stocks that make some investors so nervous. The KraneShares offering is an interesting way to drill down solely on the high-growth internet arena.

Dan Caplinger has no position in any of the stocks mentioned. The Motley Fool has no position in any of the stocks mentioned. The Motley Fool has a disclosure policy.

Author

Dan Caplinger has been a contract writer for the Motley Fool since 2006. As the Fool's Director of Investment Planning, Dan oversees much of the personal-finance and investment-planning content published daily on Fool.com. With a background as an estate-planning attorney and independent financial consultant, Dan's articles are based on more than 20 years of experience from all angles of the financial world.
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